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Making sense of KPO
Pedro Cantero, 8th February 2008
In the first few years of this decade, a new type of outsourcing emerged in India, targeting the growing research and analytical needs of a range of companies. Commentators and service providers alike immediately understood the potential of this emerging ‘knowledge processing’ sector, and a new market was born: KPO.
What is KPO?
Knowledge Process Outsourcing is the transfer of knowledge processing activities (such as research or market analysis) to an offshore location. This is primarily via an outsourcing service provider, although many organisations have made the decision to offshore this work to in-house ‘captive’ centers.
The KPO marketplace is complex, with an array of terminologies and no standard categorisation, with each commentator having a different way of structuring KPO services. At Alsbridge, we think KPO boils down into 5 basic types of activity:
- Primary research (e.g. ad-hoc surveys, interviews)
- Secondary research (e.g. desk research)
- Analytics, statistics, data mining (i.e. quantitative, number-rich analysis)
- Report production (i.e. competitive intelligence report)
- Management Information (e.g. setting up and monitoring a performance dashboard)
Ultimately, activities being considered for KPO need to pass some general ‘offshoreability’ criteria (e.g. Can the process work without proximity? Can the handoffs be managed?), and some KPO specific criteria (e.g. Can the process be offshored from a legal perspective? Are the KPO suppliers credible?).
How different is KPO to BPO? Some analysts believe that KPO is the natural next step after BPO; others simply consider KPO as an ‘intellectual subset’ of BPO. In many ways, KPO is managed in just the same way as a typical BPO activity. On the other hand, many new rules apply. For example, some note that KPO is more suited to “output based” pricing strategies (e.g. an equity research activity may be charged according to the number of fields and data points included). The debate is still ongoing.
Yet despite disagreement about how to classify the KPO, it is unmistakably a growth sector, and by some measures it is the fastest growing part of the outsourcing market. Some reports claim an estimated growth rate of over 40% a year over the next 4 years (compared with around 25% for BPO). Analysts predict that the KPO market will be worth $10-12 billion by 2008, rising to $16 billion by 2010. So where is the demand coming from?
Who wants KPO?
KPO has been driven above all by two industries. Firstly, the financial services sector, where research and number-crunching activities are core to a range of support functions, such as equity and credit analysis in the banking and insurance sectors. Secondly, telecoms and consumer retail companies have turned to KPO to take on the complex and laborious tasks of data mining and market analysis.
From these beginnings, a range of other sectors are starting to adopt KPO, such as telecoms, biotech and pharmaceutical, animation, consumer goods and retail. And within each organisation, there is any number of potential corporate ‘customers’ who could make use of KPO – both in functional departments such as marketing, sales, IT, finance or HR, as well as in the industry-specific domains such as, in the case of financial services, mortgages, insurance or investment banking.
What is causing this rush to KPO?
Like the market itself, there is a complex mixture of motivations, not all of which are connected to the standard cost reduction rationales of other outsourcing projects. The factors for organizations to outsource their research and analysis needs into KPO are various but we think the key drivers would be Key drivers of KPO are:
- Finding external expertise – KPO tasks often rely on highly skilled, and scarce, resources. There are only so many actuarial experts or data mining analysts available in a given city, so it can make sense for the search for new talent to go global.
- Tapping into best practices – KPO service providers are specialists in knowledge processing. They have insights and best practices that are not available to those doing everything in-house.
- More bang for your buck – Because KPO providers use offshore resources, it is possible to get much more knowledge work done with the same amount of spend. Given that most KPO projects are relatively small with a few dozen resources at most, increasing the impact of fixed knowledge spending is often
The battle for the KPO market
There is an unresolved question in the KPO marketplace – who is best placed to provide solutions: generalists or specialists? Many KPO activities are very niche, with small scale projects of just a few resources. In this environment, small specialist providers are able to compete effectively with the global outsourcing brands, such as Accenture or IBM, who dominate the worlds of ITO and BPO.
The KPO Specialists, such as Evalueserve or Amba Research, have had a head start on the general service providers. Yet their exclusive focus on KPO is balanced against the greater brand power and geographical reach of the global vendors. At the moment it is too early to tell which way the market will go. And as in previous phases of outsourcing, there is scope for meeting in the middle.
In terms of geography, India remains as the main KPO powerhouse - this is where the concept was first coined, and where the leading specialist suppliers are based. Other emerging markets such us China, Russia, Eastern Europe and Latin America are growing fast, and are being built into the KPO operations of leading suppliers. (i.e. Accenture has research and quantitative analysis capabilities in more than 17 countries, including India, China and South Africa; Evalueserve has established research centers in India, Chile, China and recently in Romania).
Nevertheless, credentials are limited in the KPO industry, particularly if an organisation is looking for a track record in an emerging industry. As a result building confidence in KPO may require piloting, very close working relationships with the supplier, and possibly working with a familiar supplier.
Working with KPO providers can follow a range of engagement models:
- Project-based – This is the most usual model, especially in the first stages of exploring KPO. This is useful for handling smaller work packages, and addressing on ad hoc peaks in demand. Many KPO providers are so convinced of the value of their services, that they offer new clients heavily discounted pilot projects as a ‘proof of concept’.
- Retained / research centre – the next step is often for the KPO provider to set up a dedicated group or centre. This is particularly useful where the KPO activity is of a ‘retained’ nature e.g. market tracking, clippings.
- Hybrid – A combination of the two approaches, including an ongoing center, plus ad hoc projects.
Getting started
KPO is a mixture of the familiar and the new. It follows many of the rules and practices of more established areas of outsourcing. Any successful KPO programme will need to follow a rigorous process of feasibility assessment, supplier selection, design and implementation. And like any outsourcing deal, success relies on keeping an eye on the relationship day to day.
Yet KPO is also new. It is a rich new sourcing opportunity. It involves some unfamiliar concepts, and brings in a new wave of suppliers. You probably won’t have heard much about KPO before reading this article. Our bet is that before the end of the year, KPO will be an area of the market you will know a lot more about.
Alsbridge Plc. advises a range of organisations on the opportunities and challenges presented by KPO. Please send any questions on KPO to Pedro.Cantero@alsbridge.eu.
About the Author
Pedro Cantero is Senior Consultant with Alsbridge plc, the award winning advisory firm on Outsourcing, Shared Services and Off-shoring. Pedro can be contacted at pedro.cantero@alsbridge.eu or on +44 (0) 20 7242 0666.
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